August 13, 2024 • 38 mins
Mike Armstrong and Paul Lane react to the Producer Price Index report that came in slightly lower than expected. Starbucks surges over 20% on news that Chipotle CEO Brian Niccol will move to the coffee chain. Market volatility is back. Will it last? Home Depot cuts outlook with consumers in 'deferral mindset'. Why the Fed has a difficult task on its hands due to conflicting views on inflation.
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Transcript
Episode Transcript
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Speaker 1 (00:00):
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with Mike Armstrong and Paul Lane.
Speaker 2 (01:14):
Good morning and welcome back to the Financial Exchange. Markets
are moving up this morning on a better than expected
inflation report. We'll be discussing why markets seem to be
reacting to an inflation report that almost nobody pays attention
to on a monthly basis.
Speaker 3 (01:31):
But a lot of it, just I think, has.
Speaker 2 (01:32):
To do with a piece that we're going to cover
later about volatility being a bit back in the game
here in markets over the last really just few weeks
compared to the last eighteen months or so, big news
out of Chipotle and Starbucks as well as home depots.
So a lot to cover here, but let's kick things
off Paul with the like I mentioned, perhaps least important
(01:54):
inflation report, the producer price Index. First of all, I'm
making perhaps too much life of it. It's not that
it's entirely unimportant, but really this is an inflation report
based on surveys of businesses rather than of consumers, meaning
it doesn't directly impact what you and me pay when
(02:15):
we you and I pay, sorry, when we go to
the grocery store or buy a car or rent a home.
It's a very different type of report. So nonetheless, what
we saw out of this was a beat on expectations here,
and like I mentioned, markets at least initially moving up
on this data looking for, i think, really anything to
(02:36):
confirm that inflation is not going to rear its ugly
head again and will we or won't we have this
recession that everybody's looking for.
Speaker 4 (02:44):
Yeah, that seems to be the major takeaway, Mike. If
you take a look at the VIX, which is a
volatility index out there, what basically just gauges investors fear
or concern within the markets. We had been at a
very low level volatility for a significant period of time.
Over the course of the last couple of weeks, like
we've talked about, that has spiked up a bit. And
(03:05):
it seems as if this market is looking for any
report that it can try and parse through to determine
or not whether or not we're going to a recession,
what direction is the economy going. It just seems to
be a really sensitive period of time for the economy
and the stock market in general. So any news that
we're going to get it seems like we'll have some
(03:26):
sort of impact on how markets behave tomorrow will have
the CPI inflation report coming out, which is much more
of a focus from the Federal Reserve and investors in general.
But perhaps here seeing a little bit of a positive
uptick due to the fact that this producer Price Index
data that comes out can have a little bit of
(03:46):
trickle down of impact into CPI because it is what
producers are paying and that is ultimately passed down to consumers.
But I would agree with your overall sentiment largely. If
you were to rank the economic reports in terms of
their importance, it would be down at the bottom pretty low.
Speaker 2 (04:02):
Nonetheless, expectations were for a zero points two percent monthly gain.
Instead you saw a zero point one percent monthly increase
on the measure of wholesale prices that the Bureau of
Labor Statistics puts out on a month to month basis.
We'll receive CPI tomorrow, that's the Consumer Price Index. This
one has historically moved markets. I said to Chuck yesterday, like,
(04:25):
these reports always matter and they're always impactful. But to me,
this July CPI report is probably the I was trying
to phrase it properly, and yesterday I said, the least
important one of the year so far. Maybe it's just
the one that I'm least concerned about. It just seems
(04:45):
where I'm wrong about That would obviously be if it
beats to the upside, which I find very unlikely.
Speaker 3 (04:52):
But if it were to do so, then.
Speaker 2 (04:54):
You do have everybody ringing the the stagflation alarm bell
of Okay, we're heading for recession, but prices aren't cooling
off like the Fed wants to. I think those would
probably be overstated, but that could be the surprise there.
So I'm not terribly concerned about the inflation report coming
out tomorrow, and that probably sounds a bit weird to
(05:17):
listeners because it's all that we have talked about the
last few years. And if you ask Mark Vandetti, he
has a bit of a different view than I do
on some of this. But rarely in history are you
able to get inflation down on just a direct path
towards two percent.
Speaker 3 (05:35):
Usually it's volatile. Usually it involves.
Speaker 2 (05:37):
A lot of economic sacrifice, and we haven't seen a
lot of those things yet. Maybe you could point towards
a higher unemployment rate as some of that economic sacrifice,
but it's been pretty mild in terms of the sacrifice.
Speaker 3 (05:48):
Part.
Speaker 4 (05:48):
Oh, No, definitely it has been because that uptick in
unemployment is more reflection of people being added to the
labor market in less a result of significant layoffs or
anything like that, and you're coming off fifty year low,
So you couple those two things together, that's not exactly
economic pain at all.
Speaker 2 (06:06):
So in the month of June, prices on the CPI
level declined by zero point one percent. Expectations for the
July report are for zero point two percent month over
month increase. The year of a year expectation is for
three percent, which would be the same as it was
last month, and then if you strip out the food
and energy actually you're expected to see the same exact
result with a zero point two percent a month over
(06:27):
month increase. So that will be coming out tomorrow morning
at eight thirty, I would argue has a little bit
more of an impact on markets than this producer price
in Producer Price Index report, and then Thursday some bigger
data coming out. So every week we get the initial
jobless claims. I've mentioned that I think this is probably
the important data point of the year here, and we
(06:50):
will be getting it every single week because that will
be the first place that you see any sort of
turn in the state of the labor market, these are
the number of people that are filing for unemployment. And
then at eight thirty on Thursday, you have the US
retail sales numbers coming out. So for quite frankly two
or three years now, you know, the American consumer has
(07:10):
been the savior of the US economy. And we've been
talking at length about how companies like Delta and Disney
and Southwest and Hilton and Airbnb are reporting a decline
in demand for their products, for their services of vacationing
and going to theme parks, and this has been a
pretty common theme in this quarter of earnings. The question
(07:33):
that I would ask, would be all right, is that
getting replaced in some way by the stuff that everybody
was buying in twenty twenty and now might be wearing down.
Speaker 3 (07:43):
Right. You know, maybe you're.
Speaker 2 (07:46):
Weber grill is not performing quite the same way. Maybe
your solo stove is all rusted out, and the treads
on your on your Peloton Peloton treadmill that sometimes eats
children are wearing down, and so you need to replace
some of those items. We will see some of that
stuff in that retail sales report Obviously there's also gasoline
(08:08):
sales and all sorts of other items in there, but
that comes out on Thursday of this week. Anything else
kind of catching your eye, Obviously Home Depot warnings came out,
will be covering those a little bit later in the show.
But anything else catching your eye about this producer price index, Paul, No.
Speaker 4 (08:23):
It seems like home Depot will dive into that that
perhaps maybe not a significant shift to services to some
of those durable good items, but we'll get into that
when we'll cover that. Other than that, to me, it
at least isn't bad news, So certainly you'll take a
positive report there, But really the focus and lies in
these reports that are coming up on Wednesday and Thursday
(08:44):
this week that I'm much more focused on it.
Speaker 2 (08:46):
As I mentioned markets positively in the positive this morning,
we've got the Dow up ninety five points, are about
a quarter of a percent, the S and P up
forty four points or eight tenths of a percent, and
then finally the NASDAC up two hundred and forty points
are about one point four percent. We're going to take
a quick break and then when we come back. There
was some breaking news this morning on leadership at Starbucks.
(09:08):
We'll be covering that when we come back.
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Speaker 2 (10:05):
Well, it's forty five minutes into trading right now, and
Starbucks is trading up by twenty three percent this morning,
up to ninety five dollars a share, whereas not really
competitor but other restaurant quasi company Chipotle Mexican Grill, trading
down thirteen percent all on the news that CEO of Chipotle,
(10:30):
Brian Nickel will be taking over the helm of CEO
at Starbucks and the current CEO there, handpicked by Howard Schultz,
will be exiting effective immediately. So this came out of
not necessarily nowhere. They Howard Schultz had been kind of
criticizing the former CEO of Starbucks over the last several weeks,
(10:51):
not really driving sales and traffic in the way that
he was expecting, but very sudden, and both companies acting
under no real news as of right now as to
who's going to take the helm at Chipotle either.
Speaker 4 (11:05):
To me, what makes this so noteworthy, Mike, is the
stock movements that you're talking about here, where I can't
recall in recent memory a CEO change like this sort
of emitting such a huge response from the market in
terms of you know, Starbucks rallying upwards of twenty percent.
Certainly you can understand that the shift in you know,
ideological practices or the track record that Brian Nichol has
(11:28):
which is pretty fantastic if you take a look at
it is reason for optimism. But to increase the company's
value twenty percent right off the get go from this change,
to me is impressive market movement. And then similarly, Chipotle,
a company that's found itself really well positioned under Nichol's leadership,
dropping by what dold we say about fifteen percent at
(11:50):
the same point in time, just where it's positioned today,
it's surprising, But to me it's Disney and Starbucks have
found themselves in an interesting spot where granted Eiger is
not a founder of Disney like Schultzes with Starbucks, but
they have had such large presence over the company for
many years and the CEO transition has just been a cluster.
(12:13):
It's been a disaster for both companies, particularly in Schultz's
case having his figure sort of looming over the company
has not really bared well in terms of the transition
of leadership. Starbucks prior to today was down about twenty
one percent since the new CEO had taken over. So
hopefully with Brian nichols expertise in this sort of what
(12:36):
do we want to call it, fast casual space of
foods that he'll be able to bring some practices. He
was previously the CEO of Young Brands, which is behind
Taco Bell and some other food chains, and then he's
been with Chipotle since twenty eighteen and really done a
fantastic job. Chipotle was coming off the heels of a
huge issue with the quality of their food. You had
(12:56):
the outbreak of illnesses with their meats, and he really
turned them into an absolute juggernaut. This stock has just
absolutely roared over the last five or six years. They've
increased sales, they've increased profitability, they have a really stronghold
on the younger demographic. They've done a fantastic job. So
I understand the optimism. I just wouldn't have told you
that it would rally twenty three percent on the news
(13:18):
with the leadership change.
Speaker 2 (13:19):
And in my mind, you know, part of what made
Chipotle and Brian Nichols so successful is really a modeling
of that business after Starbucks. Like Starbucks was the first
think about first companies to roll out a online app
ordering process, the first company start pinging you in the
afternoon for discounted drinks and all these things like that.
(13:40):
That was the model that Chipotle really built themselves after
at least in terms of not in terms of food
quality or any of that stuff. They're very different companies
from that perspective, but in terms of driving traffic. I
feel as though Brian Nickel actually modeled Chipotle after some
of the successes at Starbucks that have not been as
success full as they were previously. I have to tell
(14:04):
you you hinted at this, Paul, but I find it
quite concerning the trend at Starbucks recently, and this doesn't
this doesn't really fix any of those concerns for me.
So I want to talk a little bit more about
Howard Schultz in his history with the company. So he
ran that company I think primarily, but you know, on
and off a little bit between different roles, starting in
(14:27):
eighty seven when he purchased it from its founders. Right
up through like twenty seventeen, he had a very heavy
role in the company. In twenty seventeen, he resigned that
CEO role and you know, kind of hand picked Kevin
Johnson to run that company, which he did until twenty
twenty two, at which point Schultz once again solve problems
(14:50):
and took it over.
Speaker 3 (14:52):
He ran it for a little while.
Speaker 2 (14:53):
Before then appointing now CEO or former CEO Laxman.
Speaker 3 (15:00):
Simon.
Speaker 4 (15:01):
I looked it up this morning, but for the show Narissiman.
Speaker 2 (15:03):
Narissima, and now you know been heavily critical of him,
and you know what he did, which again you you hand.
Speaker 3 (15:12):
Picked this guy.
Speaker 2 (15:13):
You certainly had a heavy role in appointing this person
as the head of the company. And he's barely been
in that job for a year. He was started in
April of twenty twenty three, not a lot of time
for a turnaround. So I recognize that Brian Nichol is
going to be a different CEO. I would assume that
he's going to be given a lot more power and
(15:33):
flexibility than the previous CEOs were under Howard Schultz as
kind of running of the board.
Speaker 3 (15:39):
But I don't know.
Speaker 2 (15:42):
To me, this speaks to leadership problems at Starbucks that
are pretty significant. If you're running through multiple CEOs in
a period of what's that seven years, most of which
are being fired by the founder.
Speaker 4 (15:54):
When you make a transition in leadership, you have to
allow for the new leadership to take over without the
echoes of your presence in the background, where you have
to allow to entrust them that they're going to take
it over, and they have to sort of go through
their trials and tribulations. But if you breathe down their
neck within such a short span of time, it undermines them,
(16:17):
It questions their creditibility, and as a result, it just
doesn't lead to a successful business. I can't speak to
how effective you know the Laxman was as a CEO,
but I don't think it helps having a larger than
life presence like Schultz breathing down someone's neck that quickly
into the transition, particularly when you're the one who picked them.
(16:40):
And the same thing applies with Eiger at Disney and
his hiring of Bob Chaipik, who is a Netflix executive
to take over Disney. When you start questioning their decisions
within a couple quarters, it just doesn't seem to really
lead to a lot of belief that they are.
Speaker 3 (16:55):
The right person for the job.
Speaker 2 (16:56):
Now, perhaps this is the answer, right is you have
a pointed a couple people who were pretty beholden to
to Sheltz and relied on him for being appointed to
the role and really answered to him. And I don't know. Frankly,
Brian Nickel has enough of a resume and a kind
of or excitement about him. We're seeing that in the
(17:18):
stock price that I don't know that Cheltz will be
able to do the same thing. By the way, Starbucks
stock until today was down about twenty five percent over
the last twelve months. Yeah, they are facing some challenges, right,
I mean, which is kind of stunning to say for
a company that makes a product that's physically addictive, Like,
it's a pretty big advantage you're physically addictive, and you
don't have all the same taxes that cigarettes do on
(17:40):
him because you're not as as problematic for health.
Speaker 3 (17:42):
As some of those like that.
Speaker 2 (17:44):
That's a pretty good advantage that you have in markets.
I tend not to bet against products that are physically addictive,
like caffeine is I tend to take a step back there.
But look, they're facing more competition, especially overseas. They've they've
got some serious challenges in China where they've had to
make a mass expansion, and quite honestly, Chippotle doesn't have
(18:04):
those issues, right Like Chippotle doesn't have a presence in China.
They're not trying to negotiate with the Communist party there
about their next door opening. They're not trying to compete
with a homegrown you know, Chinese burrito bul That would.
Speaker 3 (18:18):
Be surprising, That would be a bit surprising, I suppose
if that.
Speaker 2 (18:20):
But you know, like Luckin Coffee is the big company
in Starbucks that's competed with them heavily, and frankly, you know,
everyone wants a piece of that pie. And like I
pointed out before, a few years ago, frankly, not that
long ago, like five six years ago, did either of
you have any like fast food type applications on your phones. No,
(18:43):
I might have gotten Starbucks like four or five years ago,
like maybe that was the first one. But you know,
these days, everyone's making that push. McDonald's wants you to
download the action offers huge discounts, Chipotle obviously wants you.
Panera pushing big on the app, and so that that
space is much more concentrated, and I would imagine that
(19:05):
what got Starbucks ahead of the pack a few years ago,
the push notifications, the things that I've talked about when
your phone ordering are not the same advantages that they
have today, and they're they're gonna have to navigate that
in a world where people are becoming more and more
price conscious at this point in time in the economy.
Speaker 3 (19:22):
Let's take a quick break. When we come back, Wall
Street Watches next. Like us on.
Speaker 1 (19:41):
Facebook and follow us on Twitter. Act TFE show.
Speaker 6 (19:45):
Breaking business news is always first right here on the
Financial Exchange Radio Network. Time now for Wall Street Watch
a complete look at what's moving market so far today
right here on the Financial Exchange Radio Network.
Speaker 5 (20:01):
Markets are currently in positive territory as traders continue to
digest this morning's PPI report that came in just below expectations.
The Dow Jones is up sixty one points or zero
point six point one six percent, the S and P
five hundreds up thirty seven points or seven tenths of
a percent, and the Nasdaq is up two hundred and
fourteen points are one point two eight percent. As we
(20:24):
just talked about. Shares of the coffee chain Starbucks is
up twenty one percent after the company replaced its chief
executive with Chipotle's CEO, Brian Nickel. Chipotle shares are currently
down twelve percent. Home Depot shares are up three quarters
of a percent after the home improvement retailer warned that
sales would be weaker than anticipated in the second half
of twenty twenty four. The company sees full year comparable
(20:47):
sales to fall by three to four percent. Earlier this year,
Home Depot guided for a roughly one percent decline. US
traded shares of the Chinese streaming company ten Cent Music
Entertainment Group are down sixteen percent. The company reported a
one point seven percent yearly decline in revenue. Monthly active
users in the mobile categories also came in below analyst forecasts.
(21:09):
And finally, taking a look at Hormale Foods, shares are
up one point two percent after City Group upgraded the
stock to buy from neutral. The firm cited improving retail
sales trends and input cost environment, as well as potential
upside to its margins in the Turkey segment. I am
ben Kitchen, and that is Wall Street.
Speaker 3 (21:29):
Watch, Paul.
Speaker 2 (21:30):
Market volatility is back, So watch out because your grandma's
investment strategy to get swept out. To see, we have
had a pretty remarkable lack of volatility through twenty twenty
three and most of twenty twenty four until a couple
of weeks ago, So I think it's worth acknowledging that.
Speaker 3 (21:48):
I also think all these articles that are being written.
Speaker 2 (21:50):
About how crazy the volatility is and you know, watch
out for this, watch out for that. Are probably overdoing
it as well. But it is reasonable to acknowledge that
last eighteen months was just kind of a slow and
steady path upwards with very few interruptions. Really since twenty
twenty two. That has been the case. Most of twenty
(22:10):
twenty three and most of twenty twenty four were like that.
There's been a narrative shift now, right, to me, the
story that consistently drove markets up for the previous eighteen
months was this concern about inflation rebounding and consistent data
(22:30):
on inflation that turned in better than expectation, right, So
you just had this It's not that there weren't any concerns, right, Like,
we had banks collapsing in April of twenty twenty three,
we had a bout of higher inflation, we had interest
rates surgeing, like all of these things were real stories
that did take place. The fact of that about it, though,
was those concerns of what could be, what could happen,
(22:51):
what normally previously did happen during other bouts of inflation
just didn't materialize.
Speaker 3 (22:56):
Right.
Speaker 2 (22:57):
We did not see inflation go from three percent to
nine percent back to five percent, and then back up
to seven percent. We instead saw CPI just had this
persistent push downward, and that allowed for a lot of
people that were hedging against the risk of a repeat
of inflation to kind of wash away those concerns and
see this persistent push forward without a recession. By the way,
(23:20):
we definitively had no recession of the last eighteen months.
Speaker 4 (23:23):
Yeah, and you also had a FED that was extremely
a commodative, not in terms of what they did from
a policy decision standpoint, because obviously they raised interest rates
to a high that we hadn't seen in a significant
period of time, but their messaging mic they always wore
the backstop and seemed to be transmitting messages to the
investment community to keep them optimistic. And I'll point to
(23:45):
in particular in December of twenty twenty three, we had
come off a very week October in terms of the market. However,
at that last part of the year in November and December,
Jerome Powell came out and said that they may be
looking at raycuts heading into this year twenty twenty four.
Here we sit, you know, eight months into the year,
perhaps on the precipice of our first rate cut, maybe second,
(24:08):
but initially going too the year, traders had priced in five,
six seven cuts and the FED head point to the
fact that there may be three and we may get
there when it's all said and done. But that really
reinvigorated the market at the end of twenty twenty three
and led into a strong twenty twenty four. That combined
with you know, inflation not beating to the upside, that
(24:28):
kept markets in a very sort of stasis and you
had Ai really sort of garner a lot of hope
from the investment community, and that's why we saw the
strong year that we've had over the last sixteen eighteen
months in terms of the market.
Speaker 2 (24:44):
So what's shifted now, at least again in my view,
what's shifted over the last few weeks. Obviously there was
the carry trade story in Japan, where Japan's economy was
effectively strengthening. The yen went up, the dollar went down
on relative of strength concerns, and so you had that
spark a whole bat of volatility. But underlying all of
(25:05):
this is now the concern about recession. It's that concern
about recession and should that recession materialize. We've talked about this, right,
stocks are pricey. You go take a look at price
to earnings ratios, they are I don't know, how do
I describe it within spitting distance of very high levels
that we've seen throughout history when you take a look
at any metric to measure the price of the stock market,
(25:26):
and the S and P five hundred in particular. So
why do I mean, aside from just the general terribleness
of recessions, why does that matter? Well, typically you see
price to earnings ratios decline during recessions because people are
less optimistic about the future, they're not willing to spend
quite as much on that stock and that future growth.
And then also the earnings themselves come down. So both
(25:48):
of those things can impact that side of both sides
of the equation when it comes to price to earnings ratios.
So I think everyone now understands the fundamental underlying risk
to this market. I don't mean to minimize that, But
what do you need to happen then for markets to
not continue this bout of volatility, for markets to overcome
(26:09):
this wall of worry, if you were, the economy just
doesn't needs to not go into a recession. That's not
a sure thing, right, Like it's not written, you know,
it's not gospel that. Oh well, when the some rule
triggers forever, there will always be a recession. I'm everybody,
myself included, is of more elevated concern about this now.
(26:30):
But imagine, if you will, for a moment, like imagine
that twelve months from now, instead of a recession, we
have an economy with under four and a half percent unemployment,
under three percent inflation, and thirty year mortgage rates at
four and a half to five percent. That's a killer economy.
(26:55):
I mean, I don't know that we will get there.
I'm not trying to predict any of this stuff, because
for all I know, we could have six percent unemployment
a few years from a year from now, we could
have a really bad recession with a poor market performance.
Speaker 3 (27:07):
I merely point out that nobody really knows.
Speaker 2 (27:09):
Nobody knows how businesses are going to react, Nobody knows
how consumers are going to react to the current climate.
We get hints here and there, but we've had moments
like this before where everybody's worried about something. Maybe it's
higher inflation, maybe it's a rebound, maybe it's a recession,
and over the last few years the narrative has been
but then we sidestepped it and everything was all right.
(27:31):
And those are the types of environments that allow for
equities to again rally in the other direction and go
forward again. I want to be really cautious about this.
I'm not projecting that, I'm not saying that's definitively where
we end up. But I think a lot of people
are sitting here, it's an election season. They're seeing unemployment climb,
(27:51):
They're seeing, you know, earnings from companies like home Depot
that are reporting that frankly, people aren't shopping there quite
as much. And I think they're shaking a little bit,
saying what's next, what's the next shoe to drop? And
that very well could come to pass. But the last
few years have been the best evidence that I have
seen in a long time that the rules of the
past don't really apply forever in the future. Yeah, when
(28:15):
you screw with the economy as much as we have
over the last few years, shut it down, reopen it,
give everybody checks, you know, float businesses, change interest rates
fast than we ever have. The old rules of past
economies don't necessarily apply and you have to proceed with
caution when assuming you know where the economy is going
to go.
Speaker 4 (28:35):
Next, it's a new game, Buco.
Speaker 2 (28:37):
Let's take a quick break when we come back, a
little bit of FED talk, and then we will be
also getting into those home depot earnings next on the
Financial Exchange.
Speaker 1 (28:47):
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Speaker 2 (29:19):
All right, Paul, we are still getting earnings coming in here.
And one that I like to talk about every quarter
when they report is home depot. It's always a pretty
good gauge in terms of how people are feeling about
housing and what they're doing to their own homes. And
in pre market trading, actually home depot was negative. They
(29:39):
have since turned positive, although not quite as strongly as
the overall s and P five hundred the overall stock market.
So while the SMP's up now almost one percent, home
depots now up six tens percent, but it was down
in pre market trading, I saw as much as one
to two. Wasn't it that much? Well, so, what did
we hear from Home dep in terms of in terms
(30:02):
of the most recent quarter.
Speaker 4 (30:03):
Basically, what Home Depot has been reiterating is that they're
not seeing this type of sales growth that they would expect.
They're seeing a decrease in comparable sales between three to
four percent versus what they had initially estimated was going
to be a one percent decline for sales. And the
feedback that they're getting from the CFO is basically a
lot of customers are deferring these larger purchases and renovations
(30:27):
and opting to do more of these smaller projects where
they may be doing a bathroom remodel, or they may
be you know, purchasing paint for smaller projects around the house,
but less so this focus of you know, renovating a
whole wing of the house. And what's interesting is the
parallels to my situation are very similar. We had looked
(30:49):
at we have a screened in porch. We had looked
at making it four seasons ahead of the summer, in
the spring at some point, and then I got a
quote or two and I just said, you know what,
screw it, it's not worth this much money on it.
But my give interest rates were sitting at a heelock
on three or four percent. You know, back where we
were in the COVID times, I probably would have kicked
around saying, hey, let's do it. It's it's relatively cheap
(31:12):
money and then I'll pay it off over time. Without
that option in place, knowing that if I were open
up a helock, I'd be looking at seven or eight percent.
It's easier to just say we painted a bathroom and
did a little bit on the vanity. You know, those
types of things were making the decision as a household,
and it seems like a lot of other Americans are
doing the same as well because of barring costs them.
Speaker 2 (31:31):
Yeah, they describe it as a deferral mindset, and I
think that I don't know this earnings report. Sometimes you
get an earnings report and you just have to put
it to the side saying, yeah, it doesn't really line
up with my narrative of what the economy looked like,
or maybe you need to change your narrative of what
the economy looks like. And home depot doesn't tell you
everything about the state of the overall US economy, but
(31:51):
it can confirm thinking on what's been going on, and
the housing market itself has seemed to be stuck in
a bit of let's call it paralysis. You've seen inventories
tick up, you have not seen sales tick up. You've
seen home staying on the market for longer, but buy
and large, you're not seeing prices come down, and that
(32:12):
speaks to that deferral mindset in my mind. You've got
sellers that maybe are motivated, but not motivated enough to
cut the prices dramatically. You've got buyers who are not
seeing the price decline substantial enough to actually come into
this market and accept a six and a half to
seven percent mortgage rate and go close on that home.
And the same thing seems to be happening with home
(32:34):
depot sales. Right If you are that next potential buyer
and you are sitting on the sideline saying, we've got
a two bed condo, we've got a second kid on
the way, we want that third bedroom single family home. No,
of course, you're not going to do a big renovation
to your two bedroom condo right now. Why would you?
(32:57):
You're not sure that it's going to pay off. You're
going to defer that. And I think that's a lot
of what we are seeing right now, especially with those
higher interest rates. And I think also too probably people
have lived through periods of time where hmm, these prices
for a screen didn't Porsche seem a little bit outrageous.
I wonder if the economy weakens a little bit, if
maybe I can get it done for a little bit
(33:17):
cheaper and.
Speaker 4 (33:17):
Borrow the money cheaper, because that's going to go hand
in hand, right Rates are going to come down if
the economy slows down, and there's gonna be less construction activities,
so maybe I can reach back out and get a
better deal.
Speaker 2 (33:28):
The perfect example of this, I was speaking with somebody
who previously kind of sat on the board for his
church and they had done a big fundraise. This was
in the mid two thousands for you know, a series
of projects that they wanted to do.
Speaker 3 (33:44):
Quotes were coming in.
Speaker 2 (33:45):
A little bit high, so they deferred a bunch of stuff,
and then the Great Recession hit and he was like, yeah,
we got you know, those couple of years, we had
all this savings from donations for this one project.
Speaker 3 (33:55):
We were going to do.
Speaker 2 (33:55):
But we got new pews, we got new air conditioning,
we redid the entrance to the church. We did this
that the other is like, suddenly there's a lot of
people bidding for our work and it became a lot
more affordable. And I think that's some of what you
are seeing right now. Not that that would be good
for home depot, that would be bad for home depot,
but that is playing into the psychology of you know,
potential home spenders right now.
Speaker 4 (34:16):
Yeah, they've seen seven straight quarters of declines in same
store sales, so it's been slow.
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Speaker 2 (35:20):
Well, Paul, it's time for our almost daily segment of
two different stories that have vastly different opinions about what
the Federal Reserve should be doing and should be doing next.
The first is an opinion piece in Bloomberg from Marcus Ashworth,
who's a columnist. Second is one from John Authors, and
the first one is an argument for why the Federal
Reserve needs to depart from their hard stance on inflation
(35:43):
at two percent. Goes on to point out that their
upcoming symposium is kind of titled on that subject of
departing from that two percent target. Whereas John Authors in
Bloomberg makes the argument that in inflation still matters more
than anything else in that two percent target seems really
(36:03):
important to him. So I don't know where do we
where do we go with this? Like I think we've
been heavily critical of the Federal Reserve, especially in the
early stages of COVID, and maybe not the very early stages.
That's when they responded really rapidly to ease conditions, but
when it was fairly obvious to most that inflation was
(36:26):
on its way up. They were late to the game. Okay,
they had to ecro. They were done with that stage.
Whatever it does to the impact of the FED is past.
I have a lot more difficult, much more difficult time
criticizing anything that the FED has done over the last
six months, six frankly last eighteen months.
Speaker 4 (36:44):
I would agree slow to act, but the idea of
needing to cut sooner, or anything that they've done in general,
it's hard to really knock it. I would say if
Mark Vandettios here, who probably argued that they've been a
little two panned to the equity markets, I think that's
relatively fair criticism. I would actually add one criticism of
(37:07):
December of twenty three, you know, implying that there were
going to be a significant amount of rate cuts heading
into twenty four, particularly with the first quarter showing perhaps
a return of inflation that was ill timed and there
was no reason to really make that.
Speaker 3 (37:20):
They didn't hang the mission accomplished banner exactly.
Speaker 4 (37:23):
But other than that, this idea of these two pieces,
here are these opinion ones. I really don't know where
to start in terms of kind of tearing these apart,
just because on one piece, they're arguing that they shouldn't
be so data dependent the FED that they should allow
we should allow for their expertise to make decisions and
consider other factors. But what other factors? And to me,
(37:44):
it just seems like other economic reports is what they
should consider, and they do do that. Don't think that
they sit back and look at three reports to make
a decision. And that's what this opinion piece, to me
at least read, is that they are heavily dependent on data.
And the argument being made rears its head again in
a recent report that that would cause things to change.
Speaker 3 (38:04):
But yeah, I tend to agree with you.
Speaker 2 (38:06):
If they were wholly data dependent to every single report,
that would be a different story, but they've been pretty
clear that they're willing to depart from some of those
data points and treat them as just a bump in
the road. Let's take a quick break, but a lot
more to cover in the second hour of the Financial Exchange.
Speaker 3 (38:22):
We'll be right back
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(01:04):
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Speaker 2 (01:14):
Good morning and welcome back to the Financial Exchange. Markets
are moving up this morning on a better than expected
inflation report. We'll be discussing why markets seem to be
reacting to an inflation report that almost nobody pays attention
to on a monthly basis.
Speaker 3 (01:31):
But a lot of it, just I think, has.
Speaker 2 (01:32):
To do with a piece that we're going to cover
later about volatility being a bit back in the game
here in markets over the last really just few weeks
compared to the last eighteen months or so, big news
out of Chipotle and Starbucks as well as home depots.
So a lot to cover here, but let's kick things
off Paul with the like I mentioned, perhaps least important
(01:54):
inflation report, the producer price Index. First of all, I'm
making perhaps too much life of it. It's not that
it's entirely unimportant, but really this is an inflation report
based on surveys of businesses rather than of consumers, meaning
it doesn't directly impact what you and me pay when
(02:15):
we you and I pay, sorry, when we go to
the grocery store or buy a car or rent a home.
It's a very different type of report. So nonetheless, what
we saw out of this was a beat on expectations here,
and like I mentioned, markets at least initially moving up
on this data looking for, i think, really anything to
(02:36):
confirm that inflation is not going to rear its ugly
head again and will we or won't we have this
recession that everybody's looking for.
Speaker 4 (02:44):
Yeah, that seems to be the major takeaway, Mike. If
you take a look at the VIX, which is a
volatility index out there, what basically just gauges investors fear
or concern within the markets. We had been at a
very low level volatility for a significant period of time.
Over the course of the last couple of weeks, like
we've talked about, that has spiked up a bit. And
(03:05):
it seems as if this market is looking for any
report that it can try and parse through to determine
or not whether or not we're going to a recession,
what direction is the economy going. It just seems to
be a really sensitive period of time for the economy
and the stock market in general. So any news that
we're going to get it seems like we'll have some
(03:26):
sort of impact on how markets behave tomorrow will have
the CPI inflation report coming out, which is much more
of a focus from the Federal Reserve and investors in general.
But perhaps here seeing a little bit of a positive
uptick due to the fact that this producer Price Index
data that comes out can have a little bit of
(03:46):
trickle down of impact into CPI because it is what
producers are paying and that is ultimately passed down to consumers.
But I would agree with your overall sentiment largely. If
you were to rank the economic reports in terms of
their importance, it would be down at the bottom pretty low.
Speaker 2 (04:02):
Nonetheless, expectations were for a zero points two percent monthly gain.
Instead you saw a zero point one percent monthly increase
on the measure of wholesale prices that the Bureau of
Labor Statistics puts out on a month to month basis.
We'll receive CPI tomorrow, that's the Consumer Price Index. This
one has historically moved markets. I said to Chuck yesterday, like,
(04:25):
these reports always matter and they're always impactful. But to me,
this July CPI report is probably the I was trying
to phrase it properly, and yesterday I said, the least
important one of the year so far. Maybe it's just
the one that I'm least concerned about. It just seems
(04:45):
where I'm wrong about That would obviously be if it
beats to the upside, which I find very unlikely.
Speaker 3 (04:52):
But if it were to do so, then.
Speaker 2 (04:54):
You do have everybody ringing the the stagflation alarm bell
of Okay, we're heading for recession, but prices aren't cooling
off like the Fed wants to. I think those would
probably be overstated, but that could be the surprise there.
So I'm not terribly concerned about the inflation report coming
out tomorrow, and that probably sounds a bit weird to
(05:17):
listeners because it's all that we have talked about the
last few years. And if you ask Mark Vandetti, he
has a bit of a different view than I do
on some of this. But rarely in history are you
able to get inflation down on just a direct path
towards two percent.
Speaker 3 (05:35):
Usually it's volatile. Usually it involves.
Speaker 2 (05:37):
A lot of economic sacrifice, and we haven't seen a
lot of those things yet. Maybe you could point towards
a higher unemployment rate as some of that economic sacrifice,
but it's been pretty mild in terms of the sacrifice.
Speaker 3 (05:48):
Part.
Speaker 4 (05:48):
Oh, No, definitely it has been because that uptick in
unemployment is more reflection of people being added to the
labor market in less a result of significant layoffs or
anything like that, and you're coming off fifty year low,
So you couple those two things together, that's not exactly
economic pain at all.
Speaker 2 (06:06):
So in the month of June, prices on the CPI
level declined by zero point one percent. Expectations for the
July report are for zero point two percent month over
month increase. The year of a year expectation is for
three percent, which would be the same as it was
last month, and then if you strip out the food
and energy actually you're expected to see the same exact
result with a zero point two percent a month over
(06:27):
month increase. So that will be coming out tomorrow morning
at eight thirty, I would argue has a little bit
more of an impact on markets than this producer price
in Producer Price Index report, and then Thursday some bigger
data coming out. So every week we get the initial
jobless claims. I've mentioned that I think this is probably
the important data point of the year here, and we
(06:50):
will be getting it every single week because that will
be the first place that you see any sort of
turn in the state of the labor market, these are
the number of people that are filing for unemployment. And
then at eight thirty on Thursday, you have the US
retail sales numbers coming out. So for quite frankly two
or three years now, you know, the American consumer has
(07:10):
been the savior of the US economy. And we've been
talking at length about how companies like Delta and Disney
and Southwest and Hilton and Airbnb are reporting a decline
in demand for their products, for their services of vacationing
and going to theme parks, and this has been a
pretty common theme in this quarter of earnings. The question
(07:33):
that I would ask, would be all right, is that
getting replaced in some way by the stuff that everybody
was buying in twenty twenty and now might be wearing down.
Speaker 3 (07:43):
Right. You know, maybe you're.
Speaker 2 (07:46):
Weber grill is not performing quite the same way. Maybe
your solo stove is all rusted out, and the treads
on your on your Peloton Peloton treadmill that sometimes eats
children are wearing down, and so you need to replace
some of those items. We will see some of that
stuff in that retail sales report Obviously there's also gasoline
(08:08):
sales and all sorts of other items in there, but
that comes out on Thursday of this week. Anything else
kind of catching your eye, Obviously Home Depot warnings came out,
will be covering those a little bit later in the show.
But anything else catching your eye about this producer price index, Paul, No.
Speaker 4 (08:23):
It seems like home Depot will dive into that that
perhaps maybe not a significant shift to services to some
of those durable good items, but we'll get into that
when we'll cover that. Other than that, to me, it
at least isn't bad news, So certainly you'll take a
positive report there, But really the focus and lies in
these reports that are coming up on Wednesday and Thursday
(08:44):
this week that I'm much more focused on it.
Speaker 2 (08:46):
As I mentioned markets positively in the positive this morning,
we've got the Dow up ninety five points, are about
a quarter of a percent, the S and P up
forty four points or eight tenths of a percent, and
then finally the NASDAC up two hundred and forty points
are about one point four percent. We're going to take
a quick break and then when we come back. There
was some breaking news this morning on leadership at Starbucks.
(09:08):
We'll be covering that when we come back.
Speaker 1 (09:09):
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Speaker 2 (10:05):
Well, it's forty five minutes into trading right now, and
Starbucks is trading up by twenty three percent this morning,
up to ninety five dollars a share, whereas not really
competitor but other restaurant quasi company Chipotle Mexican Grill, trading
down thirteen percent all on the news that CEO of Chipotle,
(10:30):
Brian Nickel will be taking over the helm of CEO
at Starbucks and the current CEO there, handpicked by Howard Schultz,
will be exiting effective immediately. So this came out of
not necessarily nowhere. They Howard Schultz had been kind of
criticizing the former CEO of Starbucks over the last several weeks,
(10:51):
not really driving sales and traffic in the way that
he was expecting, but very sudden, and both companies acting
under no real news as of right now as to
who's going to take the helm at Chipotle either.
Speaker 4 (11:05):
To me, what makes this so noteworthy, Mike, is the
stock movements that you're talking about here, where I can't
recall in recent memory a CEO change like this sort
of emitting such a huge response from the market in
terms of you know, Starbucks rallying upwards of twenty percent.
Certainly you can understand that the shift in you know,
ideological practices or the track record that Brian Nichol has
(11:28):
which is pretty fantastic if you take a look at
it is reason for optimism. But to increase the company's
value twenty percent right off the get go from this change,
to me is impressive market movement. And then similarly, Chipotle,
a company that's found itself really well positioned under Nichol's leadership,
dropping by what dold we say about fifteen percent at
(11:50):
the same point in time, just where it's positioned today,
it's surprising, But to me it's Disney and Starbucks have
found themselves in an interesting spot where granted Eiger is
not a founder of Disney like Schultzes with Starbucks, but
they have had such large presence over the company for
many years and the CEO transition has just been a cluster.
(12:13):
It's been a disaster for both companies, particularly in Schultz's
case having his figure sort of looming over the company
has not really bared well in terms of the transition
of leadership. Starbucks prior to today was down about twenty
one percent since the new CEO had taken over. So
hopefully with Brian nichols expertise in this sort of what
(12:36):
do we want to call it, fast casual space of
foods that he'll be able to bring some practices. He
was previously the CEO of Young Brands, which is behind
Taco Bell and some other food chains, and then he's
been with Chipotle since twenty eighteen and really done a
fantastic job. Chipotle was coming off the heels of a
huge issue with the quality of their food. You had
(12:56):
the outbreak of illnesses with their meats, and he really
turned them into an absolute juggernaut. This stock has just
absolutely roared over the last five or six years. They've
increased sales, they've increased profitability, they have a really stronghold
on the younger demographic. They've done a fantastic job. So
I understand the optimism. I just wouldn't have told you
that it would rally twenty three percent on the news
(13:18):
with the leadership change.
Speaker 2 (13:19):
And in my mind, you know, part of what made
Chipotle and Brian Nichols so successful is really a modeling
of that business after Starbucks. Like Starbucks was the first
think about first companies to roll out a online app
ordering process, the first company start pinging you in the
afternoon for discounted drinks and all these things like that.
(13:40):
That was the model that Chipotle really built themselves after
at least in terms of not in terms of food
quality or any of that stuff. They're very different companies
from that perspective, but in terms of driving traffic. I
feel as though Brian Nickel actually modeled Chipotle after some
of the successes at Starbucks that have not been as
success full as they were previously. I have to tell
(14:04):
you you hinted at this, Paul, but I find it
quite concerning the trend at Starbucks recently, and this doesn't
this doesn't really fix any of those concerns for me.
So I want to talk a little bit more about
Howard Schultz in his history with the company. So he
ran that company I think primarily, but you know, on
and off a little bit between different roles, starting in
(14:27):
eighty seven when he purchased it from its founders. Right
up through like twenty seventeen, he had a very heavy
role in the company. In twenty seventeen, he resigned that
CEO role and you know, kind of hand picked Kevin
Johnson to run that company, which he did until twenty
twenty two, at which point Schultz once again solve problems
(14:50):
and took it over.
Speaker 3 (14:52):
He ran it for a little while.
Speaker 2 (14:53):
Before then appointing now CEO or former CEO Laxman.
Speaker 3 (15:00):
Simon.
Speaker 4 (15:01):
I looked it up this morning, but for the show Narissiman.
Speaker 2 (15:03):
Narissima, and now you know been heavily critical of him,
and you know what he did, which again you you hand.
Speaker 3 (15:12):
Picked this guy.
Speaker 2 (15:13):
You certainly had a heavy role in appointing this person
as the head of the company. And he's barely been
in that job for a year. He was started in
April of twenty twenty three, not a lot of time
for a turnaround. So I recognize that Brian Nichol is
going to be a different CEO. I would assume that
he's going to be given a lot more power and
(15:33):
flexibility than the previous CEOs were under Howard Schultz as
kind of running of the board.
Speaker 3 (15:39):
But I don't know.
Speaker 2 (15:42):
To me, this speaks to leadership problems at Starbucks that
are pretty significant. If you're running through multiple CEOs in
a period of what's that seven years, most of which
are being fired by the founder.
Speaker 4 (15:54):
When you make a transition in leadership, you have to
allow for the new leadership to take over without the
echoes of your presence in the background, where you have
to allow to entrust them that they're going to take
it over, and they have to sort of go through
their trials and tribulations. But if you breathe down their
neck within such a short span of time, it undermines them,
(16:17):
It questions their creditibility, and as a result, it just
doesn't lead to a successful business. I can't speak to
how effective you know the Laxman was as a CEO,
but I don't think it helps having a larger than
life presence like Schultz breathing down someone's neck that quickly
into the transition, particularly when you're the one who picked them.
(16:40):
And the same thing applies with Eiger at Disney and
his hiring of Bob Chaipik, who is a Netflix executive
to take over Disney. When you start questioning their decisions
within a couple quarters, it just doesn't seem to really
lead to a lot of belief that they are.
Speaker 3 (16:55):
The right person for the job.
Speaker 2 (16:56):
Now, perhaps this is the answer, right is you have
a pointed a couple people who were pretty beholden to
to Sheltz and relied on him for being appointed to
the role and really answered to him. And I don't know. Frankly,
Brian Nickel has enough of a resume and a kind
of or excitement about him. We're seeing that in the
(17:18):
stock price that I don't know that Cheltz will be
able to do the same thing. By the way, Starbucks
stock until today was down about twenty five percent over
the last twelve months. Yeah, they are facing some challenges, right,
I mean, which is kind of stunning to say for
a company that makes a product that's physically addictive, Like,
it's a pretty big advantage you're physically addictive, and you
don't have all the same taxes that cigarettes do on
(17:40):
him because you're not as as problematic for health.
Speaker 3 (17:42):
As some of those like that.
Speaker 2 (17:44):
That's a pretty good advantage that you have in markets.
I tend not to bet against products that are physically addictive,
like caffeine is I tend to take a step back there.
But look, they're facing more competition, especially overseas. They've they've
got some serious challenges in China where they've had to
make a mass expansion, and quite honestly, Chippotle doesn't have
(18:04):
those issues, right Like Chippotle doesn't have a presence in China.
They're not trying to negotiate with the Communist party there
about their next door opening. They're not trying to compete
with a homegrown you know, Chinese burrito bul That would.
Speaker 3 (18:18):
Be surprising, That would be a bit surprising, I suppose
if that.
Speaker 2 (18:20):
But you know, like Luckin Coffee is the big company
in Starbucks that's competed with them heavily, and frankly, you know,
everyone wants a piece of that pie. And like I
pointed out before, a few years ago, frankly, not that
long ago, like five six years ago, did either of
you have any like fast food type applications on your phones. No,
(18:43):
I might have gotten Starbucks like four or five years ago,
like maybe that was the first one. But you know,
these days, everyone's making that push. McDonald's wants you to
download the action offers huge discounts, Chipotle obviously wants you.
Panera pushing big on the app, and so that that
space is much more concentrated, and I would imagine that
(19:05):
what got Starbucks ahead of the pack a few years ago,
the push notifications, the things that I've talked about when
your phone ordering are not the same advantages that they
have today, and they're they're gonna have to navigate that
in a world where people are becoming more and more
price conscious at this point in time in the economy.
Speaker 3 (19:22):
Let's take a quick break. When we come back, Wall
Street Watches next. Like us on.
Speaker 1 (19:41):
Facebook and follow us on Twitter. Act TFE show.
Speaker 6 (19:45):
Breaking business news is always first right here on the
Financial Exchange Radio Network. Time now for Wall Street Watch
a complete look at what's moving market so far today
right here on the Financial Exchange Radio Network.
Speaker 5 (20:01):
Markets are currently in positive territory as traders continue to
digest this morning's PPI report that came in just below expectations.
The Dow Jones is up sixty one points or zero
point six point one six percent, the S and P
five hundreds up thirty seven points or seven tenths of
a percent, and the Nasdaq is up two hundred and
fourteen points are one point two eight percent. As we
(20:24):
just talked about. Shares of the coffee chain Starbucks is
up twenty one percent after the company replaced its chief
executive with Chipotle's CEO, Brian Nickel. Chipotle shares are currently
down twelve percent. Home Depot shares are up three quarters
of a percent after the home improvement retailer warned that
sales would be weaker than anticipated in the second half
of twenty twenty four. The company sees full year comparable
(20:47):
sales to fall by three to four percent. Earlier this year,
Home Depot guided for a roughly one percent decline. US
traded shares of the Chinese streaming company ten Cent Music
Entertainment Group are down sixteen percent. The company reported a
one point seven percent yearly decline in revenue. Monthly active
users in the mobile categories also came in below analyst forecasts.
(21:09):
And finally, taking a look at Hormale Foods, shares are
up one point two percent after City Group upgraded the
stock to buy from neutral. The firm cited improving retail
sales trends and input cost environment, as well as potential
upside to its margins in the Turkey segment. I am
ben Kitchen, and that is Wall Street.
Speaker 3 (21:29):
Watch, Paul.
Speaker 2 (21:30):
Market volatility is back, So watch out because your grandma's
investment strategy to get swept out. To see, we have
had a pretty remarkable lack of volatility through twenty twenty
three and most of twenty twenty four until a couple
of weeks ago, So I think it's worth acknowledging that.
Speaker 3 (21:48):
I also think all these articles that are being written.
Speaker 2 (21:50):
About how crazy the volatility is and you know, watch
out for this, watch out for that. Are probably overdoing
it as well. But it is reasonable to acknowledge that
last eighteen months was just kind of a slow and
steady path upwards with very few interruptions. Really since twenty
twenty two. That has been the case. Most of twenty
(22:10):
twenty three and most of twenty twenty four were like that.
There's been a narrative shift now, right, to me, the
story that consistently drove markets up for the previous eighteen
months was this concern about inflation rebounding and consistent data
(22:30):
on inflation that turned in better than expectation, right, So
you just had this It's not that there weren't any concerns, right, Like,
we had banks collapsing in April of twenty twenty three,
we had a bout of higher inflation, we had interest
rates surgeing, like all of these things were real stories
that did take place. The fact of that about it, though,
was those concerns of what could be, what could happen,
(22:51):
what normally previously did happen during other bouts of inflation
just didn't materialize.
Speaker 3 (22:56):
Right.
Speaker 2 (22:57):
We did not see inflation go from three percent to
nine percent back to five percent, and then back up
to seven percent. We instead saw CPI just had this
persistent push downward, and that allowed for a lot of
people that were hedging against the risk of a repeat
of inflation to kind of wash away those concerns and
see this persistent push forward without a recession. By the way,
(23:20):
we definitively had no recession of the last eighteen months.
Speaker 4 (23:23):
Yeah, and you also had a FED that was extremely
a commodative, not in terms of what they did from
a policy decision standpoint, because obviously they raised interest rates
to a high that we hadn't seen in a significant
period of time, but their messaging mic they always wore
the backstop and seemed to be transmitting messages to the
investment community to keep them optimistic. And I'll point to
(23:45):
in particular in December of twenty twenty three, we had
come off a very week October in terms of the market. However,
at that last part of the year in November and December,
Jerome Powell came out and said that they may be
looking at raycuts heading into this year twenty twenty four.
Here we sit, you know, eight months into the year,
perhaps on the precipice of our first rate cut, maybe second,
(24:08):
but initially going too the year, traders had priced in five,
six seven cuts and the FED head point to the
fact that there may be three and we may get
there when it's all said and done. But that really
reinvigorated the market at the end of twenty twenty three
and led into a strong twenty twenty four. That combined
with you know, inflation not beating to the upside, that
(24:28):
kept markets in a very sort of stasis and you
had Ai really sort of garner a lot of hope
from the investment community, and that's why we saw the
strong year that we've had over the last sixteen eighteen
months in terms of the market.
Speaker 2 (24:44):
So what's shifted now, at least again in my view,
what's shifted over the last few weeks. Obviously there was
the carry trade story in Japan, where Japan's economy was
effectively strengthening. The yen went up, the dollar went down
on relative of strength concerns, and so you had that
spark a whole bat of volatility. But underlying all of
(25:05):
this is now the concern about recession. It's that concern
about recession and should that recession materialize. We've talked about this, right,
stocks are pricey. You go take a look at price
to earnings ratios, they are I don't know, how do
I describe it within spitting distance of very high levels
that we've seen throughout history when you take a look
at any metric to measure the price of the stock market,
(25:26):
and the S and P five hundred in particular. So
why do I mean, aside from just the general terribleness
of recessions, why does that matter? Well, typically you see
price to earnings ratios decline during recessions because people are
less optimistic about the future, they're not willing to spend
quite as much on that stock and that future growth.
And then also the earnings themselves come down. So both
(25:48):
of those things can impact that side of both sides
of the equation when it comes to price to earnings ratios.
So I think everyone now understands the fundamental underlying risk
to this market. I don't mean to minimize that, But
what do you need to happen then for markets to
not continue this bout of volatility, for markets to overcome
(26:09):
this wall of worry, if you were, the economy just
doesn't needs to not go into a recession. That's not
a sure thing, right, Like it's not written, you know,
it's not gospel that. Oh well, when the some rule
triggers forever, there will always be a recession. I'm everybody,
myself included, is of more elevated concern about this now.
(26:30):
But imagine, if you will, for a moment, like imagine
that twelve months from now, instead of a recession, we
have an economy with under four and a half percent unemployment,
under three percent inflation, and thirty year mortgage rates at
four and a half to five percent. That's a killer economy.
(26:55):
I mean, I don't know that we will get there.
I'm not trying to predict any of this stuff, because
for all I know, we could have six percent unemployment
a few years from a year from now, we could
have a really bad recession with a poor market performance.
Speaker 3 (27:07):
I merely point out that nobody really knows.
Speaker 2 (27:09):
Nobody knows how businesses are going to react, Nobody knows
how consumers are going to react to the current climate.
We get hints here and there, but we've had moments
like this before where everybody's worried about something. Maybe it's
higher inflation, maybe it's a rebound, maybe it's a recession,
and over the last few years the narrative has been
but then we sidestepped it and everything was all right.
(27:31):
And those are the types of environments that allow for
equities to again rally in the other direction and go
forward again. I want to be really cautious about this.
I'm not projecting that, I'm not saying that's definitively where
we end up. But I think a lot of people
are sitting here, it's an election season. They're seeing unemployment climb,
(27:51):
They're seeing, you know, earnings from companies like home Depot
that are reporting that frankly, people aren't shopping there quite
as much. And I think they're shaking a little bit,
saying what's next, what's the next shoe to drop? And
that very well could come to pass. But the last
few years have been the best evidence that I have
seen in a long time that the rules of the
past don't really apply forever in the future. Yeah, when
(28:15):
you screw with the economy as much as we have
over the last few years, shut it down, reopen it,
give everybody checks, you know, float businesses, change interest rates
fast than we ever have. The old rules of past
economies don't necessarily apply and you have to proceed with
caution when assuming you know where the economy is going
to go.
Speaker 4 (28:35):
Next, it's a new game, Buco.
Speaker 2 (28:37):
Let's take a quick break when we come back, a
little bit of FED talk, and then we will be
also getting into those home depot earnings next on the
Financial Exchange.
Speaker 1 (28:47):
This is your home for the most comprehensive coverage of
the economy and the trends on Wall Street. This is
the Financial Exchange Radio Network. The Financial Exchange streams live
on YouTube, bike our page, and stay up to date
on breaking business news all morning. Loan Base is the
Financial Exchange Radio Network.
Speaker 2 (29:19):
All right, Paul, we are still getting earnings coming in here.
And one that I like to talk about every quarter
when they report is home depot. It's always a pretty
good gauge in terms of how people are feeling about
housing and what they're doing to their own homes. And
in pre market trading, actually home depot was negative. They
(29:39):
have since turned positive, although not quite as strongly as
the overall s and P five hundred the overall stock market.
So while the SMP's up now almost one percent, home
depots now up six tens percent, but it was down
in pre market trading, I saw as much as one
to two. Wasn't it that much? Well, so, what did
we hear from Home dep in terms of in terms
(30:02):
of the most recent quarter.
Speaker 4 (30:03):
Basically, what Home Depot has been reiterating is that they're
not seeing this type of sales growth that they would expect.
They're seeing a decrease in comparable sales between three to
four percent versus what they had initially estimated was going
to be a one percent decline for sales. And the
feedback that they're getting from the CFO is basically a
lot of customers are deferring these larger purchases and renovations
(30:27):
and opting to do more of these smaller projects where
they may be doing a bathroom remodel, or they may
be you know, purchasing paint for smaller projects around the house,
but less so this focus of you know, renovating a
whole wing of the house. And what's interesting is the
parallels to my situation are very similar. We had looked
(30:49):
at we have a screened in porch. We had looked
at making it four seasons ahead of the summer, in
the spring at some point, and then I got a
quote or two and I just said, you know what,
screw it, it's not worth this much money on it.
But my give interest rates were sitting at a heelock
on three or four percent. You know, back where we
were in the COVID times, I probably would have kicked
around saying, hey, let's do it. It's it's relatively cheap
(31:12):
money and then I'll pay it off over time. Without
that option in place, knowing that if I were open
up a helock, I'd be looking at seven or eight percent.
It's easier to just say we painted a bathroom and
did a little bit on the vanity. You know, those
types of things were making the decision as a household,
and it seems like a lot of other Americans are
doing the same as well because of barring costs them.
Speaker 2 (31:31):
Yeah, they describe it as a deferral mindset, and I
think that I don't know this earnings report. Sometimes you
get an earnings report and you just have to put
it to the side saying, yeah, it doesn't really line
up with my narrative of what the economy looked like,
or maybe you need to change your narrative of what
the economy looks like. And home depot doesn't tell you
everything about the state of the overall US economy, but
(31:51):
it can confirm thinking on what's been going on, and
the housing market itself has seemed to be stuck in
a bit of let's call it paralysis. You've seen inventories
tick up, you have not seen sales tick up. You've
seen home staying on the market for longer, but buy
and large, you're not seeing prices come down, and that
(32:12):
speaks to that deferral mindset in my mind. You've got
sellers that maybe are motivated, but not motivated enough to
cut the prices dramatically. You've got buyers who are not
seeing the price decline substantial enough to actually come into
this market and accept a six and a half to
seven percent mortgage rate and go close on that home.
And the same thing seems to be happening with home
(32:34):
depot sales. Right If you are that next potential buyer
and you are sitting on the sideline saying, we've got
a two bed condo, we've got a second kid on
the way, we want that third bedroom single family home. No,
of course, you're not going to do a big renovation
to your two bedroom condo right now. Why would you?
(32:57):
You're not sure that it's going to pay off. You're
going to defer that. And I think that's a lot
of what we are seeing right now, especially with those
higher interest rates. And I think also too probably people
have lived through periods of time where hmm, these prices
for a screen didn't Porsche seem a little bit outrageous.
I wonder if the economy weakens a little bit, if
maybe I can get it done for a little bit
(33:17):
cheaper and.
Speaker 4 (33:17):
Borrow the money cheaper, because that's going to go hand
in hand, right Rates are going to come down if
the economy slows down, and there's gonna be less construction activities,
so maybe I can reach back out and get a
better deal.
Speaker 2 (33:28):
The perfect example of this, I was speaking with somebody
who previously kind of sat on the board for his
church and they had done a big fundraise. This was
in the mid two thousands for you know, a series
of projects that they wanted to do.
Speaker 3 (33:44):
Quotes were coming in.
Speaker 2 (33:45):
A little bit high, so they deferred a bunch of stuff,
and then the Great Recession hit and he was like, yeah,
we got you know, those couple of years, we had
all this savings from donations for this one project.
Speaker 3 (33:55):
We were going to do.
Speaker 2 (33:55):
But we got new pews, we got new air conditioning,
we redid the entrance to the church. We did this
that the other is like, suddenly there's a lot of
people bidding for our work and it became a lot
more affordable. And I think that's some of what you
are seeing right now. Not that that would be good
for home depot, that would be bad for home depot,
but that is playing into the psychology of you know,
potential home spenders right now.
Speaker 4 (34:16):
Yeah, they've seen seven straight quarters of declines in same
store sales, so it's been slow.
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Speaker 2 (35:20):
Well, Paul, it's time for our almost daily segment of
two different stories that have vastly different opinions about what
the Federal Reserve should be doing and should be doing next.
The first is an opinion piece in Bloomberg from Marcus Ashworth,
who's a columnist. Second is one from John Authors, and
the first one is an argument for why the Federal
Reserve needs to depart from their hard stance on inflation
(35:43):
at two percent. Goes on to point out that their
upcoming symposium is kind of titled on that subject of
departing from that two percent target. Whereas John Authors in
Bloomberg makes the argument that in inflation still matters more
than anything else in that two percent target seems really
(36:03):
important to him. So I don't know where do we
where do we go with this? Like I think we've
been heavily critical of the Federal Reserve, especially in the
early stages of COVID, and maybe not the very early stages.
That's when they responded really rapidly to ease conditions, but
when it was fairly obvious to most that inflation was
(36:26):
on its way up. They were late to the game. Okay,
they had to ecro. They were done with that stage.
Whatever it does to the impact of the FED is past.
I have a lot more difficult, much more difficult time
criticizing anything that the FED has done over the last
six months, six frankly last eighteen months.
Speaker 4 (36:44):
I would agree slow to act, but the idea of
needing to cut sooner, or anything that they've done in general,
it's hard to really knock it. I would say if
Mark Vandettios here, who probably argued that they've been a
little two panned to the equity markets, I think that's
relatively fair criticism. I would actually add one criticism of
(37:07):
December of twenty three, you know, implying that there were
going to be a significant amount of rate cuts heading
into twenty four, particularly with the first quarter showing perhaps
a return of inflation that was ill timed and there
was no reason to really make that.
Speaker 3 (37:20):
They didn't hang the mission accomplished banner exactly.
Speaker 4 (37:23):
But other than that, this idea of these two pieces,
here are these opinion ones. I really don't know where
to start in terms of kind of tearing these apart,
just because on one piece, they're arguing that they shouldn't
be so data dependent the FED that they should allow
we should allow for their expertise to make decisions and
consider other factors. But what other factors? And to me,
(37:44):
it just seems like other economic reports is what they
should consider, and they do do that. Don't think that
they sit back and look at three reports to make
a decision. And that's what this opinion piece, to me
at least read, is that they are heavily dependent on data.
And the argument being made rears its head again in
a recent report that that would cause things to change.
Speaker 3 (38:04):
But yeah, I tend to agree with you.
Speaker 2 (38:06):
If they were wholly data dependent to every single report,
that would be a different story, but they've been pretty
clear that they're willing to depart from some of those
data points and treat them as just a bump in
the road. Let's take a quick break, but a lot
more to cover in the second hour of the Financial Exchange.
Speaker 3 (38:22):
We'll be right back
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